The Insurance Council of Australia (ICA) says a two-year transition will be needed to prepare for the extension of unfair contract term laws to the sector.

Proposed arrangements would substantially change risk exposures, requiring the renegotiation of reinsurance contracts, ICA says in a submission on the draft bill.

“At the lower end, a 12-month reinsurance contract for catastrophes requires six months for renewal,” it says. “Furthermore, reinsurance renewals typically involve international offices in cross-border negotiations.”

The Federal Government has proposed the new laws will apply 18 months after the legislation is finally approved.

ICA is seeking major changes to the bill, which it says will result in higher premiums and worsen affordability and availability problems in the northern Queensland and professional indemnity markets.

CEO Rob Whelan says the main subject matter of insurance contracts is defined too narrowly and would lead to significant uncertainty, while requirements are more onerous than for other sectors.

“We are seriously concerned that the draft bill, if enacted, would harm rather than improve consumer outcomes,” he says.

ICA has proposed following the European approach, which allows consumers to challenge terms that unfairly prevent them from receiving protection they thought they had purchased, while also providing certainty for insurers.

In a case study, ICA says flood exclusions could be challenged under the draft bill, potentially causing insurers in some instances to remove consumer choice and only allow flood risk inclusion.

The impact could mean an average 646% increase in premiums for customers living in a high flood risk area, who would be not be able to opt-out of flood cover.

An extension of unfair contract terms provisions to insurance was recommended by the Hayne royal commission.